An extremist, not a fanatic

June 30, 2008

The Bank of England says mortgage approvals in May fell to their lowest level since their data began in 1993.This chart shows why this matters for house prices. It shows that mortgage approvals can be a lead indicator of annual house price inflation (on HBOS’s measure). For example, dips in approvals in 2000 and 2004 led to falls in price inflation, whilst rises in approvals in 2002 and 2004 led to rises in inflation.Since April 1993, the correlation between approvals and price inflation in the following 12 months has been 0.42, with an R-squared of 23.5%. The regression equation is:Inflation = -14.01 + (22.97 x 100,000 approvals)If this equation continues to hold - and this is always a big if when one variable is at a record low - it points to prices falling 4.4% between now and May 2009.This doesn’t seem too dramatic, given that prices have dropped 6.4% in the last 12 months.However, this would leave prices more than 10% below their peak. And the standard error in this equation is 6.3 percentage points, so current approvals are quite consistent with prices dropping 10% by May 2009.And this equation implies that approvals would have to rise to over 60,000 for prices to stabilize. That’s a 40% rise from current levels.Good job housing isn’t net wealth, isn’t it?

June 29, 2008

It’s a weekend, so you’re probably expecting me to write something controversial. So here goes. Women - I don’t think much of ‘em. Here are seven reasons why.1. They have “feelings.” It would be futile to decry so widespread a human failing, but women - more than men - compound this shortcoming. They think their feelings matter. Worse, they are prone to mistake them for thoughts. 2. They are self-obsessed. The counterpart of believing their feelings matter is that women are less interested in the external world than men. You don’t often get women in pub quiz teams. In this respect, TV is a mirror onto the world. Carrie Bradshaw, who’s interested only in self and shoes, is a icon to many women. But the women who are really attractive to men - Calleigh Duquesne, Dana Scully, Martha Jones for example - are those who take an interest in the outside world. 3. Women are not ironists. Despite the fact that they disproportionately read English at college, women tend not to realise that there can be a big gap between author and text, and under-rate the virtue of insincerity. The upshot is that, like the silliest Muslims, they are quick to be "offended."4. Women are unmusical. It’s a paradox that whereas mostofmyfavouritemusicismade by women, hardly any of the women I actually meet have much interest in any form of music. I’ve lost count of the times one has asked me what sort of music I like and looked blank when I’ve replied, until I’ve cottoned on: “y’know, like the soundtrack to O Brother Where Art Thou?” I do not have this problem with men.5. Women are cowards. They are therefore more likely to look to the state to protect them; they are more likely (pdf) to support ID cards and a DNA database than men. 6. Women have careers. Now, I’m not saying that a woman’s place is in the home; in my experience they are best kept well clear of a kitchen. Quite the opposite. Ambition is unattractive in any gender, and yet women, more than men, are likely to boast of being so. They fail to see that anyone who is still ambitious past the age of 30 can consider themselves a failure. 7. Women are posh. Men like me - who have been effortlessly upwardly mobile - are ten a penny. But such women - East Europeans aside - are very scarce. From university on, most of the English women I’ve met have been from “nice” middle class families. This creates an enormous barrier. People who have been brought up to see their father as the solution to their problems cannot understand those who see him as the problem - and vice versa. Now, I’m not saying all this because I’ve been on a run of bad luck since moving to Rutland; I very much have London women in mind here. Nor - obviously - do the above points apply to all women. Instead, the question is: am I a victim of selection effects here? Going through Oxford, the City and journalism means the women I’ve met have been a very biased sample of all women; points 6 and 7 are nonsensical otherwise. The trouble is is that they have been a badly biased sample.Which brings me to social mobility. Brown said this week; “I want the opportunity to rise from the place where they are to the place where they can be, to be there for everybody.”But what is insufficiently appreciated is that there are costs involved in rising to the place you can be. Better advice came from Flatt and Scruggs, of whom women have never heard: “Don’t get above your raisin.”

June 28, 2008

The universal disappointment at Gordon Brown’s performance in his first (only?) year as PM raises a point that’s been overlooked - that maybe many hiring decisions go wrong.The thing is, Brown’s track record and personal characteristics were a matter of public record for 25 years before he became PM. He was, or should have been, a known quantity. And yet, although he was appointed unopposed to widespread acclaim he is now obviously, pitifully, not up to the job. Which raises the possibility: if someone could prove to have been a disastrous appointment even when he was well known, how much more likely are hiring decisions to go wrong in the more normal cases, where hirers know less about the candidate?In many cases, of course, the problem is avoided simply by the job requiring technical skills. If you can write code well, or build a wall or cure patients, it doesn’t much matter if your employer misjudged your character.And in those managerialist jobs where soft skills do matter, a new employee can use a number of ruses to hide his incompetence:1. Just act. As Machiavelli said:

A prince doesn't need to have all the [good] qualities…but it is necessary that he appear to have them. I'll even add to this: having good qualities and always practicing them is harmful, while appearing to practice them is useful. It's good to appear to be pious, faithful, humane, honest, and religious…A prince must take great care never to let anything come from his mouth that is not full of the above-mentioned five qualities, and he must appear to all who see and hear him to be completely pious, completely faithful, completely honest, completely humane, and completely religious.

And if you can pretend to be good for long enough, you might become good - as in that famous story in Colditz, where a man who feigned madness in order to escape actually went mad.2. Exploit the endowment effect. The day you start a job, you are in credit. Your boss thinks you’re the right person for the job - that's why he hired you. He wants to persuade others that he’s a good judge, so he’ll big you up to his colleagues. And the endowment effect means people value things highly simply because they’ve just got them. If you do nothing obviously wrong, therefore, folks will have a good opinion of you.3. Do little, but promise big. Years ago, a colleague of mine did almost nothing in his first six months, except promise fancy things and cuss the IT systems for his inability to get them started. Having arrived with a high reputation, this ruse kept him going for some time.4. Pick the low-hanging fruit first. Even if you’re a duffer, there’ll be some things you can do that’ll impress your colleagues. Combined with point 2, this can get you a long way. A former boss of mine was convinced I was a genius, merely because my first call was a good one. 5. Delegate. There’s a well-regarded Chief Exec of a FTSE 100 company who is an expert in project finance. So, he takes a keen interest in those aspects of the business where this expertise is needed, whilst giving managers of other departments a free hand. Even at lower levels, such delegation is often possible. If your technical skills are a bit iffy, you can spend more time with clients. Or if you’re not so good with clients, you can stick more to the technical stuff.6. Learn. If you can ask the right questions in the right way - which is a vastly under-rated skill - you can pull off the hat-trick: you can motivate your colleagues and underlings by appearing interested in them; gain a reputation for collegiality and openness; and plug the gaps in your ignorance. 7. Exploit sheepskin effects. If folks treat you as a genius - and thanks to point 2 they will initially - it’s easy to pass yourself off as one; your silences will be read as thoughtfulness rather than stupidity; your silly remarks as devil’s advocacy. 8. Leave before you get caught out. All management consultants know this.Anyone with a bit of self-control and nous can, therefore, cover up the fact that they are the wrong man for the job - and, after a while, maybe even turn into the right man. Brown’s tragedy is that - either out of personal failings or bad luck - he was unable to do this.

June 27, 2008

Households saved just 1.1% of their disposable income in Q1, the lowest rate since 1959. This has prompted the usual fears that consumers will have to rein back their spending eventually.Such fears tell us more about the ideology of the commentariat than about the economy. It believes the public are just feckless idiots who need rescuing from their own recklessness.But there’s another more mundane explanation for low savings. The figures (tables A7 and A38 of this pdf) show that there were several shocks to income and spending in Q1.Taxes rose by £1.6bn and income from interest, rent and dividends fell by £1.3bn (seasonally adjusted). Together, these factors took 1.3% off disposable income. And thanks to higher oil prices, spending on transport rose 3.7%; this alone accounts for a quarter of the rise in nominal spending in Q1.What’s going on here is people reduced their savings as, variously, City folk have paid taxes on their bonuses, rentiers got lower interest and rental income, and most of us have paid higher petrol prices.And this is just what economic theory says we should do - we change our savings in the face of shocks, so as to stabilize real spending. Consumers are telling us that Q1 saw a number of temporary factors that justify a temporary run-down in savings, not a major change in our lifestyle.Was this judgment right? We can’t know for sure: it takes some arrogance to bet against the wisdom of crowds unless you have pressing reasons to do so. But what we do know is that consumers have not seen any reason to retrench yet. After all, spending boomed in May.Recessions are hardly ever (never?) caused by autonomous changes in consumer savings. Find something else to worry about.

June 26, 2008

What use are nation states? Two different problems raise this question. One is Zimbabwe. The notion that national sovereignty has a value provides a cloak for Mugabe’s brutality, whilst the difficulty of co-ordinating national governments means little is done to stop it.The other problem is inflation. Many governments claim inflation is an imported problem. And they are right in the sense that global factors seem to be increasing relative to national ones as causes of inflation. This means national monetary policy is less able to control inflation.This raises the question. Could it be that nation states are just too small to solve some important problems? They are not big enough to solve some coordination problems, or to restrain tyrants, or to internalize externalities - think of climate change.And yet, in other senses they are too big. The Economist reports that Americans are increasingly choosing to live with like-minded people, suggesting nation states aren’t providing a sense of fraternity and unity. Not a day passes without yet more evidence that national governments display the incompetence arising from diseconomies of scale. And it’s a cliché that people are alienated from national politics or that national provision of public services is unresponsive to individual needs.So, here are my questions. What are the problems which are best solved by national governments rather than global government or smaller-scale authorities (and the individual is, of course, a very important small-scale authority)? What should be the criteria we use for answering that question? If nation states did not exist, would we these days feel a pressing need to invent them?

June 25, 2008

Bryan Appleyard accuses economists of envying science. This is both true and false. It’s true, in the sense that we all know some economists who think the hallmark of good research is strings of equations that tell us what we know using algebra we don’t - cargo cult science.But in many respects, it’s false. Medical errors kill almost 200,000 Americans a year. Cosmologists reckon most of the universe consists of stuff for which there is little direct empirical evidence. And scientists’ discussion of climate change seems - to this uniformed observer at least - to be as shrillas the Keynesian-monetary disputes of the 1970s. Why should economists envy any of that?And economics is a “science” - whatever science is supposed to mean - in many senses. We test theories against evidence. Indeed, our statistical methods are more sophisticated than many in the natural sciences; on the rare occasions I’ve read papers in the BMJ, their statistical evidence has struck me as light reading compared to any economics journal. There is progress in economics; even development economics, which is pretty disputatious, is in better shape now than it was in the 60s. And, increasingly, economists can use laboratory experiments.Of course, many results in economics are imprecise. But if precision were the mark of a science, James Ussher would be the greatest cosmologist in history.Nor do the notorious failings of economic forecasting discredit economics as a science. Quite the opposite. They vindicate a major point of economics - that people respond to incentives even if the results are undesirable in aggregate. Economists make forecasts not because we know what the future holds, but because people pay us to. The fact that forecasts for next year’s GDP go awry does nothing to show that economics is not a science - any more than the failure of biology to predict what future species will evolve discredits biology.Of course, some economists envy physics’ production of scientific laws. But this is because physicists have it easy, not having to study the crooked timber of humanity. For them, results that hold in the US also hold in France. The physical world doesn’t change much from year to year (but!). The objects of physicists’ study don’t learn from their past, or have intentions or just cussedness. And no-one gives economists $10bn to study our ideas.My message here isn’t just to Bryan. It’s to economists: be a little more proud of your discipline.

Danny Finkelstein argues that peer effects matter more than parenting in influencing how children turn out. In fact, there’s a ton of economic research which shows that peer effects are indeed important. For example, this paper shows that American teenagers whose friends take drugs are themselves much more likely to do so. And this shows that crime is strongly influenced by peer effects. These effects are not confined to impressionable youngsters. This paper shows that team-mates of Jose Canseco - a baseball player who took steroids - enjoyed a strange improvement in their performance when they started playing with him, suggesting they learned from his drug-taking.Not that all peer effects are so bad. Shop workers become more productive when they work alongside more productive colleagues, a finding corroborated by this study (pdf) of fruit-pickers.And then there’s a ton of evidence for peer effects in schooling. Some of it is summarized in this pdf. Other papers are here, here, here (doc) and here (pdf). The most notorious paper is Roland Fryer's claim (pdf) that negative peer pressure ("acting white") can hold back able black students in school. You might object here that such peer effects are over-estimated, simply because like attracts like. Maybe teenagers who take drugs choose other friends who take drugs, so what looks like a peer effect is in fact a mundane selection effect. However, many of the papers overcome this problem by using random selection or other controls. And this paper finds that peer effects work even in laboratory settings.So Danny’s right - peer effects matter.This is not, however, entirely welcome for traditional conservatives, for three reasons. First, because it complicates the question of moral responsibility; if individuals‘ life outcomes are so heavily influenced by the accidental circumstances of whom they associate with, it‘s difficult to hold them responsible for what they become in later life - as I argued here.Second, it’s an argument against selection in education - by ability or income, because such selection deprives less able children from poor homes of the opportunity to benefit from positive peer effects.Thirdly, it’s an argument against banging up young criminals. After all, if peer effects matter, surrounding someone with criminals will create more crime, as this pdf shows.

June 24, 2008

Brown’s desire to increase social mobility seems to have led to two errors.One is expressed by Stephen Pollard and Wat Tyler - that the decline in social mobility is due to the abolition of the grammar schools. I doubt it. Yes, grammar schools do seem to educate people better. But they can’t be a great force for upward mobility simply because very few poor students get into them. This paper explains.And remember - social mobility wasn’t very high even when grammar schools were ubiquitous. The big evidence for declining social mobility is this paper, which compares the fates of those born in 1958 to those born in 1970. But it shows that, even among the 1958 cohort, sons from the richest quartile of families were 1.68 times as likely to get into the top quartile themselves as sons from the bottom quartile.The second, bigger error is Brown’s claim that “parents must want their children to do better than they did themselves.”Not if we want social mobility, they mustn’t. Social mobility is conventionally defined as the chances of making it from the bottom quartile to top quartile. Upward mobility by the poor therefore requires that the rich be downwardly mobile. Only 25% of people can be in the top quartile. If we want more poor kids to get into that 25%, we must have fewer rich ones in it.And this highlights the big problem. Any serious effort to greatly increase social mobility will be deeply illiberal, as it requires the state to intervene in family life to stop rich parents passing their advantage to their children - for example by banning private education.What are the alternatives? One is to increase spending on educating children from poor families, to improve their chances relative to the rich. But this would be humungously expensive. This classic US study found that equalizing opportunity between blacks and whites in the US requires up to 10 times as much to be spent on educating blacks as whites.The reason for this is simple; the link between education spending and adult earnings is modest, so big rises in spending have only weak effects. The back of a beer mat corroborates this. It costs seven times as much to educate a child at Eton as at a state secondary school. But to genuinely equalize opportunity between a poor kid and an Etonian requires more to be spent on the former, to compensate for the disadvantages of worse social ties or a less encouraging home environment.Achieving equality of opportunity through education seems, therefore, impractical.Which leaves another possibility - greater equality of outcome. This paper shows that nations with greater income equality have greater social mobility. Again, this is basic maths. The nearer is the top quartile to the bottom quartile, the easier it is to move from one to the other.So, I reckon Norm got it right. Equality of opportunity without greater equality of resources is just impossible.

June 23, 2008

The violence in Zimbabwe raises a problem for the theory of liberal interventionism that I fear doesn’t get the attention it deserves. It’s about selection effects.The problem is that dictators select their own populations, by killing democrats or sending them into exile. As a result, the longer and more brutal is the dictatorship, the harder it will be to establish democracy afterwards. This is because the people able and willing to build democracy will be dead or leading new lives in exile, whilst supporters of the old regime and enemies of democracy will be numerous and well-armed.Which leads to two paradoxes of interventionism:1. The more necessary is intervention, the less likely it is to succeed, because the most savage dictators select against democrats more ruthlessly. It’s been harder to build democracy in Iraq than in the eastern Europe in part because Saddam selected against democrats more ruthlessly than did the Communist party.2. By the time the “international community” (yuk) has gathered enough evidence and support to intervene, it’s too late to do so most effectively - which is when the dictator’s opponents are still alive.The obvious solution to these paradoxes is to prevent dictatorships arising in the first place - though how this is to be done is a tougher question. But this is, of course, no help to Zimbabweans.

Having made an arse of himself in Britain, Gordon Brown is seeking a bigger stage on which to display his inadequacies. He’s called for “a commitment to increased supply and investment by [oil] producers.”When will he learn? People do things not because he asks nicely, but because they have incentives to do so. And right now, oil producers have little incentive to raise output. Why bother converting oil below ground into dollars above ground when the expected real returns on those dollars - and by extension financial assets generally - are so low? Hotelling’s rule tells us that when real interest rates are low, commodity prices will be high - though the counterpart of this is that the expected rate of price increase will also be low.What Brown is doing here is the same Darling did in calling for pay restraint. He’s ignoring economic realities.So why do they do this?Maybe they have to play to the gallery. They have to appear to say the right things, even if doing so makes them look foolish.Or maybe they have become intoxicated by their own ideology. They’ve come to believe in a mystical thing called “leadership”, and think they can change people’s behaviour against their material interests just by showing “leadership.”